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Corporate Finance : Microsoft's bid for yahoo gets M&A back on track

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Apart from the ongoing consolidation in the financial services industry, January was an extremely slow month for mergers and acquisitions. That all changed quickly on February 1, however, with Microsoft’s $44.6 billion bid for Yahoo.

Microsoft’s chief financial officer, Chris Liddell, says the Redmond, Washington-based software company might borrow for the first time in its history instead of drawing down its entire $21 billion cash mountain to fund the cash portion of its offer. “It’s going to be a mixture of the cash we have on hand plus debt,” Liddell said in an annual strategy meeting with analysts shortly after the bid for Yahoo was announced.

Microsoft agreed to pay a 62% premium to the market price to acquire Yahoo, which it hopes will help it challenge Google’s dominance of the online search and advertising markets. The deal raised the hopes of investment bankers, who feared a decline in M&A; activity this year following 2007’s record $4.5 trillion in worldwide announced deals.

Morgan Stanley and the Blackstone Group are Microsoft’s financial advisers in its unsolicited bid for Yahoo. Goldman Sachs and Lehman Brothers are advising Yahoo.

With the credit crunch putting a damper on private equity deals, the willingness of companies to use cash to make strategic acquisitions could help to support the M&A; market in 2008.

Meanwhile, Bank of America agreed in January to acquire Countrywide Financial, based in Calabasas, California, and until recently the largest mortgage lender in the United States, in an all-stock deal valued at more than $4 billion. Bank of America made a $2 billion cash infusion into Countrywide by buying its preferred stock last August, as financial pressures built on Countrywide during the subprime mortgage crisis.

Elsewhere in the financial services industry, the CME Group confirmed in late January that it was in preliminary talks to buy Nymex, the New York-based energy and metals exchange, in a deal valued at $11 billion. The combined group would have a market value of about $60 billion, making it the largest exchange group in the world. Merrill Lynch and JPMorgan are advising Nymex.

Last year CME acquired the Chicago Board of Trade for $12 billion. A wave of consolidation is sweeping the world’s securities exchanges at a time when heavy investments in technology are required to provide the speed and quality of service that new computer-driven trading techniques require.

In another deal that hints of the potential for more mergers this year, Pittsburgh-based Alcoa and Aluminum Corporation of China (Chinalco) on February 1 announced the joint purchase of 12% of London-listed Rio Tinto’s shares in a deal valued at about $14 billion. The transaction represents the largest-ever foreign investment by a Chinese company and appears aimed at blocking Australia-based BHP Billiton’s takeover bid for Rio Tinto.

BHP Billiton’s three-for-one share offer for Rio Tinto was rejected on the basis that it undervalued the company, but BHP said it would continue to press for the deal. Beijing-based Chinalco is China’s largest aluminum producer and is a major diversified metals and mining company.

From a regional point of view, Europe fell well behind the Americas in announced M&A; deals in January and failed to match the total for Asia, according to Thomson Financial. Some $82 billion of deals were announced in the Americas in January, compared to less than $33 billion in Europe and nearly $35 billion in Asia.

Microsoft’s planned $1 billion tender offer to acquire Norway-based Fast Search & Transfer was one of the largest M&A; transactions announced in Europe in January.